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July 1, 2015

New York Law Journal

Condominium unit-owners typically manage their property through a homeowners association, which collects regular assessments from all unit-owners to maintain and improve the association’s property. Whereas individual homeowners who set aside funds to maintain and improve their own homes will not incur any tax liability, a condominium association that collects assessments from unit-owners for the same purposes may have such assessments treated as taxable income. To correct this anomaly and to encourage condominium property improvement and maintenance, in 1976 Congress added §528 to the Internal Revenue Code (IRC)—to exempt from income tax dues, fees, and assessments collected by a qualified homeowners association and used for the maintenance and improvement of association property. Condominium associations or their boards of managers, as well as residential real estate management and timeshare associations, are eligible for this favorable tax treatment, from which housing cooperatives are excluded.

This column discusses the conditions that a condominium association must meet in order to qualify as a homeowners association under IRC §528, the tax-motivated reasons why a condominium association or board may choose not to elect §528 treatment, and what the tax consequences may be for a condominium association or board electing to be outside of (or not eligible for) the benefits of §528—at the federal, New York State and New York City levels. Importantly, given the pros and cons of electing §528 tax status, including the possibility of individual unit-owner tax liability, and the difficulty of revoking such status after a §528 election has been made, the board of managers of a condominium association should seek advice based on the association’s unique circumstances from a knowledgeable tax advisor prior to determining whether to elect IRC §528 tax treatment.

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